Escolar Documentos
Profissional Documentos
Cultura Documentos
On
The Indian brokerage Industry
Submitted To:
Submitted By:
Aakriti Agarwal
Neha Chhabra (cft08_079)
Pooja srivastava(cft08_098)
Prashant saxena(cft08_102)
Priyanka arya (cft08_104)
Shivika Gaur
Submitted On:
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Executive Summary
This report analyzes the Indian retail brokerage industry taking into account the health of the
capital markets and the intensity of competition among the brokerage companies. Michael
Porter's Five Forces Analysis has been employed to present a picture to gain an understanding of
the competitive landscape and industry attractiveness. It covers important segments of the
industry and analyses market dynamics.
A differentiating aspect of this report is a comparative assessment of the top brokerages firms on
various value indicators.
The report also includes a comparative product grid of the companies under consideration.
The major growth drivers for brokerage revenue and trading volume are:
Though the Indian brokerage industry has been consolidating steadily over the last 10 years, the
share of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In
this fragmented market, leading players like ICICI Direct, Kotak Securities, Indiabulls,
Sharekhan, and 5 Paisa, apart from many small players, compete on the basis of low brokerage
fees and customer service
Buoyed by the bullish Indian stock market, foreign banks such as Société Générale (SocGen),
BNP Paribas, Standard Chartered, and Macquarie Bank (Australia) are eyeing stakes in Indian
retail brokerages.
The major growth drivers of the Indian retail brokerage industry are the increasing appetite for
equities among investors as an asset class, the convenience of online trading, and declining
brokerage fees
OVERVIEW
The Indian retail brokerage industry consists of companies that primarily act as agents for the
buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a
commission or transaction fee basis.
It has two main interdependent segments: Primary market and the Secondary market.
The Indian broking industry is one of the oldest trading industries that had been around even
before the establishment of the BSE in 1875. Despite passing through a number of changes in the
post liberalization period, the industry has found its way towards sustainable growth. The
evolution of the brokerage market is explained in three phases: pre1990, 1990-2000, post 2000.
Early Years
The equity brokerage industry in India is one of the oldest in the Asia region. India had an active
stock market for about 150 years that played a significant role in developing risk markets as also
promoting enterprise and supporting the growth of industry.
The roots of a stock market in India began in the 1860s during the American Civil War that led
to a sudden surge in the demand for cotton from India resulting in setting up of a number of joint
stock companies that issued securities to raise finance. This trend was akin to the rapid growth of
securities markets in Europe and the North America in the background of expansion of railroads
and exploration of natural resources and land development.
Bombay, at that time, was a major financial centre having housed 31 banks, 20 insurance
companies and 62 joint stock companies.
In the aftermath of the crash, banks, on whose building steps share brokers used to gather to seek
stock tips and share news, disallowed them to gather there, thus forcing them to find a place of
their own, which later turned into the Dalal Street. A group of about 300 brokers formed the
stock exchange in Jul 1875, which led to the formation of a trust in 1887 known as the “Native
Share and Stock Brokers Association”.
A unique feature of the stock market development in India was that that it was entirely driven by
local enterprise, unlike the banks which during the pre-independence period were owned and run
by the British. Following the establishment of the first stock exchange in Mumbai, other stock
exchanges came into being in major cities in India, namely Ahmedabad (1894), Calcutta (1908),
Madras (1937), Uttar Pradesh and Nagpur (1940) and Hyderabad (1944). The stock markets
gained from surge and boom in several industries such as jute (1870s), tea (1880s and 1890s),
coal (1904 and 1908) etc, at different points of time.
A new set of economic and financial sector reforms that began in the early 1990s gave further
impetus to the growth of the stock markets in India. As a part of the reform process, it became
imperative to strengthen the role of the capital markets that could play an important role in
efficient mobilisation and allocation of financial resources to the real economy. Towards this
end, several measures were taken to streamline the processes and systems including setting up an
efficient market infrastructure to enable Indian finance to grow further and mature. The
importance of an efficient micro market infrastructure came into focus following the incidence of
market abuses in securities and banking markets in 1991 and 2001 that led to extensive
investigations by two respective Joint Parliamentary Committees.
The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an
administrative arrangement, was given statutory powers with the enactment of the SEBI Act,
1992. The broad objectives of the SEBI include
The scope and functioning of the SEBI has greatly expanded with the rapid growth of securities
markets in India in the last fifteen years.
Following the recommendations of the High Powered Study Group on Establishment of New
Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by financial
institutions with an aim to provide access to investors all over the country. NSE was incorporated
in Nov 1992 as a tax paying company, the first of such stock exchanges in India, since stock
exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stock
exchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It commenced
operations in wholesale debt segment in Jun 1994 and capital market segment (equities) in Nov
1994. The setting up of the National Stock Exchange brought to Indian capital markets several
innovations and modern practices and procedures such as nationwide trading network, electronic
trading, greater transparency in price discovery and process driven operations that had significant
bearing on further growth of the stock markets in India.
Faster and efficient securities settlement system is an important ingredient of a successful stock
market. To speed the securities settlement process, The Depositories Act 1996 was passed that
allowed for dematerialisation (and rematerialisation) of securities in depositories and the transfer
of securities through electronic book entry. The National Securities Depository Limited (NSDL)
set up by leading financial institutions, commenced operations in Oct 1996. Regulations
governing selection of various types of market intermediaries as depository participations were
made. Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock
Exchange and other financial institutions came into being.
Rapid Growth
The last decade has been exceptionally good for the stock markets in India. In the back of wide
ranging reforms in regulation and market practice as also the growing participation of foreign
institutional investment, stock markets in India have showed phenomenal growth in the early
1990s. The stock market capitalization in mid-2007 is nearly the same size as that of the gross
domestic product as compared to about 25 percent of the latter in the early 2000s. Investor base
continued to grow from domestic and international markets. The value of share trading witnessed
a sharp jump too. Foreign institutional investment in Indian stock markets showed continuous
rise reaching about USD10 bn in each of these years between FY04 to FY06. Stock markets
became intensely technology and process driven, giving little scope for manual intervention that
has been the source of market abuse in the past. Electronic trading, digital certification, straight
through processing, electronic contract notes, online broking have emerged as major trends in
technology. Risk management became robust reducing the recurrence of payment defaults.
Product expansion took place in a speedy manner. Indian equity markets now offer, in addition
to trading in equities, opportunities in trading of derivatives in futures and options in index and
stocks. ETFs are showing gradual growth. Within five years of introduction of derivatives,
Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian
stock markets are transaction intensive and thus rank among the top five markets in this regard.
Stock exchange reforms brought in professional management separating conflicts of interest
between brokers as owners of the exchanges and traders/dealers. The demutualisation and
corporatisation of all stock exchanges is nearing completion and the boards of the stock
exchanges now have majority of independent directors. Foreign institutions took stake in India’s
two leading domestic stock exchanges. While NYSE Group led consortium took stake in the
National Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought equity in the
Bombay Stock Exchange Ltd.
Indian Brokerage Industry
India in Global Markets
The stature and significance of India is growing in the world capital markets. India is not only
attracting greater interest from world markets, but is also assuming increasing importance in
global finance.
• India is a major recipient of foreign institutional flows amongst the emerging markets.
Since the opening up of domestic stock markets to foreign investors, cumulative net FII
investments reached Rs 517 Bn by 2008 end.
• India is major destination of private equity flows into the emerging markets
• India was host to the annual meetings/conference of the World Federation of Exchanges
(2005) and International Organization of Securities Commission (IOSCO) (2007)
• India emerged a trillion dollar market capitalisation market in 2007, and was among the
top 10 stock exchanges in the world in terms of market capitalisation
• India is amongst the top fifteen stock exchanges in the world in respect of equity turnover
• India emerged as a leading player in commodities futures market
• India is amongst the top five in the number of transactions
• India is among the top five in respect of volume traded in Stock Index Futures and Stock
Futures
• India is one of the few markets with extensive dematerialisation of shares
• India’s T+2 securities settlement cycle is at par with the global standards
• Indian stock markets have the largest number of listings, with trading taking place in
about 2,500-3,000 stocks
• India’s most popular stock index (Sensex) is constructed on the basis of full float
methodology, one of the firsts in the Asian region and a global standard
• Indian market indices such as Sensex and CNX Nifty are listed in foreign exchanges for
trading as ETFs.
2. Capital Markets
Index Movement
The BSE Sensex saw an unprecedented swing in Calendar Year (CY) 08 - from 20,873 in
January 2008 to 8,451 in November 2008. The key negatives that drove down Indian markets
were weakness in global financial markets, slowdown in the domestic economy, tight monetary
policy in 1 HFY09, and heavy selling by Foreign Institutional Investors (FII). All these factors
contributed to a series of large downgrades in corporate sector earnings. Another highlight of
FY09 has been a 27% depreciation in the Indian rupee v/s the US dollar, which has also had a
negative impact on earnings.
FY09 was the first fiscal in India's history when FIIs were net sellers in Indian equities;
secondary market FII outflows for the year were Rs. 479 billion. Interestingly, FY08 was the
year of record net FII inflows of Rs. 517 billion. However, mutual funds continued to be net
buyers for the sixth consecutive year. In FY09, mutual funds were net buyers to the tune of Rs.
66 billion, which is a 52% drop from Rs. 137 billion of net buying in FY08.
3. Broking Industry
The average daily equity market volumes for FY09 were Rs. 612 billion, down 16% from Rs.
726 billion in FY08. However, during the six years beginning FY03, the year when cash and
derivatives were fully active on both the exchanges, total market volumes have grown by 50%
compounded annually. During this period, volumes in the derivatives and cash segments have
grown at a compounded annual growth rate (CAGR) of 72% and 27%, respectively. The notable
trends in customer segmental volume mix that influence market volumes are as follows:
1. The contribution of retail volumes has declined from 61% in FY08 to 55% FY09; the
retail contribution ratio has been more volatile than the other two market segments.
2. The contribution of institutional volumes, i.e. volumes from FII and domestic
institutional investors (DIIs) such as mutual funds, banks and insurance companies has
remained stable at 15% for FY08 and FY09.
3. The contribution of proprietary volumes, which include arbitrage and other proprietary
volumes of stock brokers, has increased from 24% in FY08 to 30% in FY09.
Growth in average daily volumes on the NSE & BSE from FY03 to FY09 (Rupees in billions)
Demat Accounts
Note:
2. FY09 figure includes figures of NSDL as on 31 March 2009 and figures of CDSL as on 28
February 2009
3. All the above numbers indicate active accounts except of CDSL for the period between FY00
to FY05, which are total number of demat accounts with CDSL .The number of demat accounts
in the country shows the depth of equity penetration. CDSL and NSDL together have over 15
million active demat accounts.
4. Investment Banking
The CY 2008 saw a decline in total deal activity in terms of volume and value of deals both in
the Mergers and Acquisitions (M&A) and Private Equity (PE) space. However, the volume and
value of deals for both M&A and PE were higher in CY08 than in CY06. Also, the average deal
size for both M&A and PE was larger in CY08 than in CY06.
1. The total value of deals (M&A and PE) announced during CY08 was US$42
billion
2. The average deal size during the year was US$68.17 million for M&A and
US$33.93 million for PE
3. There were 766 deals (M&A and PE) during CY08 Value of different types of
deals during CY06, CY07 and CY08 (Rupees billion)
Indian companies raised equity of Rs. 549 billion in CY08 through IPOs, QIPs, additional
offerings and rights issues and other equity offerings - a decrease of 48% compared to CY07.
A total of 34 companies raised funds through IPOs in the domestic stock markets in CY08
amounting to Rs. 183 billion - a 46% drop compared to the Rs. 338 billion raised from 89 IPOs
in CY07.
The proceeds from rights offerings increased significantly from Rs. 80 billion in CY07 to Rs.
297 billion in CY08. This accounts for 54% of the total funds raised in domestic equity capital
markets in CY08.
Market Size and Characteristics
Markets
In tune with the global stock markets that began to recover from the second half of 2003; Indian
stock markets too witnessed rapid growth. India’s two leading indices, the most popular BSE
Sensex, and the one most used by the markets the National Stock Exchanges’ S&P CNX Nifty
rose to record levels. Both primary and secondary market activity experienced sharp surge. Much
progress was made in further strengthening and streamlining risk management, market regulation
and supervision. A few aspects of the major developments in the India’s stock markets are
described below.
1. Market Structure
Indian securities market is fairly large as compared to several other emerging markets.
Institutional Structure of the Indian Stock market.
Stock Exchanges(Derivatives 2
Market)
Brokers(Cash Segment) 9487
Brokers(Derivatives) 1442
Depositories 2
Depository Participants 654
Underwriters 35
Debenture Trustees 28
Mutual Funds 40
Capital Market
Players
Individual Clients (Broking and
Distribution) (60)
~INR 140 bn
Derivatives Trading
Arbitrage
Source: Dun & Bradstreet report: ‘India’s Leading Equity Broking Houses’
Major players
Comparative Financials
Rs. Crore Rs. Crore Rs. Crore
Company Name Total PAT Net
income worth
Apollo Sindhoori Capital Invsts. Ltd. 122.03 21.59 45.1
Arihant Capital Markets Ltd. 61.24 14.18 39.07
Bajaj Capital Insurance Broking Ltd. 26.05 2.87 6.99
Brics Securities Ltd. 68.01 48.89 111.78
Edelweiss Securities Ltd. 384.97 186.44 258.24
Emkay Global Financial Services Ltd. 131.79 23.5 132.26
Geojit B N P Paribas Financial Services Ltd. 208.52 48.23 233.61
India Infoline Ltd. 672.45 128.69 989.85
Indiabulls Securities Ltd. 628.31 248.66 364.02
L K P Securities Ltd. 59.06 3.46 15.66
Motilal Oswal Financial Services Limited. 34.79 17.18 399.92
Networth Stock Broking Ltd. 54.22 3.05 53.89
Reliance Capital Ltd. 952.76 1039.23 5926.97
Religare Commodities Ltd. 32.31 0.88 4.93
Total 3436.51 1786.85 8582.29
Performance Highlites
1. Edelweiss Securities Ltd.
Others 0.59
Product grid comprises of all the products offered by brokerage or securities industry. This
industry is one of major emerging industry in the country as it helps in dealing with various
financial aspects which help in building a good financial portfolio for an individual or corporate.
Product grid, in simpler terms, can be explained as the whole basket of products offered by
brokerage industry to its customers. This can further be explained by taking various companies
operating in this sector and thereby comparing the products offered by these companies.
Motilal Relianc Karvy India Kotak India Ge- Birla Share Sunda
Oswal e Bulls Securit Infoline Capit Global Khan ram
Money ies al Finance Financ
e
Equities Y Y Y Y Y Y Y Y Y Y
Derivatives Y Y Y Y Y Y Y Y Y Y
Margin Y N N N N N N Y N N
funding
Depository Y Y Y Y Y N N N Y Y
services
Portfolio Y Y Y Y Y Y Y Y Y Y
mgt
Commoditi Y Y Y Y N Y Y N Y Y
es trading
Wealth mgt Y N N N N Y Y N N Y
Research Y N N Y Y Y Y N Y N
Mf Y Y Y Y Y Y N Y Y Y
Structured N Y N N Y N Y N N N
products
Third party N Y Y N Y N Y N N N
products
Insurance N Y Y N N Y N N N Y
Real estate N Y Y N N N Y Y N Y
Tax N Y N N N N Y N N N
planning
Off-shore N Y N N N N N N N N
investment
s
e-broking Y Y N N Y N N N N N
Mortgages N N Y N Y Y N N N N
IPO Y Y N Y Y Y N Y Y Y
Loans N N Y N Y Y Y Y N N
BPO N N Y N N N N N N Y
KPO N N Y N N N N N N N
Bonds N N Y N N N Y N N N
Promoter N N Y N N N N Y N N
financing
Buy-back N N Y N N N N Y N N
financing
ESOP N N N N N N N Y N N
financing
Retail N N Y Y N N Y N N Y
financing
Corporate N N Y N N N Y Y N Y
financing
Asset Y N N N N N Y N N N
financing
On-line Y Y N Y Y Y Y N Y N
Debt Y Y Y Y Y N Y N Y N
market
Investment N N Y N N N N N N N
banking
Mergers N N Y N N N N N N N
In the above grid, various companies operating in brokerage sector has been taken which helps in
contributing to make it an industry. Along with the companies list of products have been taken
which are offered by different company. On Y-axis list of products has been taken and on X-axis
list of companies has been taken in order to study which product is being offered by which
company. In other words, comparison between the companies has been done on the basis of
products offered by them which help in establishing one firm distinct from other.
Therefore, while comparing different companies on the basis of their product basket or product
portfolio we have seen that Equities and Derivatives are two main products offered by each and
every firm in this industry in our country. Apart from this there are huge difference among the
firms in their product offerings as there are few products which are being offered by one
company only whereas, there are few which are offered by many firms. In the list of 33 different
products, Karvy offers 21 products to its customers reaching on top in our analysis whereas,
Share Khan Limited offers only 10 products and remains at the last position.
Global scenario
RECENT DEVELOPMENTS IN THE GLOBAL SECURITIES MARKETS
• Equalization
• Institutional investment
• International listings
• Emerging markets as an investment destination
• Alternative markets
• Growth of Derivatives
• Private Equity
• Hedge Funds
UK 4.72 -12.35
2006 2005
A major change in the year 2007 was the sudden leap of China into big league of global stock
markets.
• On 9 May 07, Shanghai Stock Exchange, China’s top stock market, recorded turnover of
USD33.2 bn and Shenzhen Stock Exchange, a stock market for SMEs, an equally
powerful USD15.8 bn, taking the combined turnover of both these stock exchanges on
that day to USD49.5 bn.
• In the first three months of the year 2007, value of share trading in both these Chinese
stock markets reached 89% of the whole turnover of the year 2006. Value of share
trading in Shanghai Stock Exchange rose from USD256 bn in 2003 to USD736 bn in
2006 and in the first three months of the year 2007, it already recorded USD652 bn.
• Market capitalisation in China between Apr 2006 and 2007 rose by almost 4 times,
pushing it to a position among the top 10 exchanges in the world and value of share
turnover rose 6 times making Shanghai 6 the biggest.
• Main indexes of Shanghai Stock Exchange and Shenzhen Stock Exchange posted returns
of 194% and 204% respectively in 2007.
Stock exchange consolidation
A big wave of stock exchange consolidation is taking place across the global financial markets.
• The most notable merger in the recent period is that of the New York Stock Exchange
with Archipelago that led to the demutualization of the former, which subsequently
acquired Euronext to form, NYSE Group that makes it a formidable force in the North
America and the Euro region.
• Another American exchange NASDAQ after the merger with Instinet, announced plans
to acquire OMX, which is Europe’s leading exchange as also provider of cutting edge
technology solutions for stock exchanges worldwide. Deutsche Borse’s recent acquisition
of International Securities Exchange gives the former a powerful position in the
derivatives markets in Europe and America.
• There was also sizeable consolidation within the domestic securities markets in several
countries with the merger of equities and derivatives markets in countries such as Korea,
Malaysia, and Hong Kong.
• In India, the issue of appropriate solutions for the 20 odd stock exchanges that currently
lack proper liquidity is engaging the attention of policy and regulation.
Systematic and streamlined regulation is the key strength and sustainability of the securities
markets. Though formal regulation of the securities markets is about 70 years old, some of the
recent developments in the financial markets are reshaping the scope and focus of the regulation.
These include -
Porter's five forces analysis is a framework for the industry analysis and business strategy
development developed by Michael E. Porter of Harvard Business School in 1979. It uses
concepts developed in Industrial Organization (IO) economics to derive five forces which
determine the competitive intensity and therefore attractiveness of a market. Attractiveness in
this context refers to the overall industry profitability. An "unattractive" industry is one where
the combination of forces acts to drive down overall profitability. A very unattractive industry
would be one approaching "pure competition".
Porter referred to these forces as the micro environment, to contrast it with the more general term
macro environment. They consist of those forces close to a company that affect its ability to
serve its customers and make a profit. A change in any of the forces normally requires a
company to re-assess the marketplace. The overall industry attractiveness does not imply that
every firm in the industry will return the same profitability. Firms are able to apply their core
competences, business model or network to achieve a profit above the industry average.
1. The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to
alternatives in response to price increases (high elasticity of demand).
Profitable markets that yield high returns will draw firms. This results in many new entrants,
which will effectively decrease profitability. Unless the entry of new firms can be blocked by
incumbents, the profit rate will fall towards a competitive level (perfect competition).
For most industries, this is the major determinant of the competitiveness of the industry.
Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions
such as innovation, marketing, etc.
Also described as the market of outputs. The ability of customers to put the firm under pressure
and it also affects the customer's sensitivity to price changes.
Also described as market of inputs. Suppliers of raw materials, components, labor, and services
(such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to
work with the firm, or e.g. charge excessively high prices for unique resources.
The five forces model relevant to the Indian brokerage industry
• Retail investors often lack the knowledge and expertise in the financial sector that calls
them to approach the broking houses.
• Now even various banks provide similar type of services. They also give the same service of
portfolio management and wealth management.
SWOT analysis is an important tool for auditing the overall strategic position of a business and
its environment.
STRENGTHS WEAKNESSES